Building good credit is essential to your financial future. If you want to get any type of loan, you need credit that shows lenders you are financially responsible. If you are just starting out in your ‘adult life,’ you may find it overwhelming to build credit in the first place.
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Keep reading to learn the top eight ways to build good credit.
Don’t use all of your available credit
When you do get approved for a credit card, don’t use the entire available balance. This affects your
credit utilization rate. The more debt you rack up, the lower your credit score becomes. Try keeping your outstanding credit card balance at 30% or less of the available balance. For example, if you have a $1,000 available balance, don’t charge more than $300 at a time.
Pay your credit card balances off every month
Don’t charge what you cannot afford. In other words, stop and think if you have the cash to pay off what you are about to charge. If you can’t pay it off right away, don’t charge it. You should only use your credit cards for large purchases or those that need the protection a credit card provides. Even if you use your credit cards to obtain rewards, such as cash back or airline miles, only charge what you would normally buy/pay for and make sure you pay the balance in full.
Don’t pay your bills late
Your credit card has a grace period, but it also has a due date. Don’t go beyond that date or you could
ruin your credit. This goes for any type of loan you have, including personal loans, car loans, and student loans too. If you miss your due date, pay the bill as soon as you can. Try to avoid letting the bill go more than 30 days late, otherwise it could bring your credit score down. If you want good credit, you have to pay your bills on time, which means on or before the due date.
While it might seem to make sense to close accounts you don’t use, it can actually hurt your credit. Instead, keep the accounts open. You don’t have to use the credit cards, just lock them up and forget about them. Keeping them open will help increase your account’s average age. The older your credit, the better your credit score will get, so make sure you keep accounts open whether you use them or not.
Don’t apply for more than one new account at a time
The number of inquiries on your credit report will affect your credit score too. If you need a new credit card or loan, apply for one account at a time. The only exception to this rule is if you are shopping around to get the best rate available to you for a loan. The credit bureaus will recognize that you are rate shopping and will only hit you for one inquiry. But if you apply for many credit cards or you apply for a loan every month, it won’t look like rate shopping and could look like you are desperately trying to open new accounts, which can lower your credit score.
Use your credit cards
It might seem like letting your credit cards sit unused is the best way to build new credit, but it isn’t the right way. You need to use your credit cards to prove that you are financially responsible. By showing lenders that you charge only what
you can afford and can pay your balances in full, you can build good credit faster. It’s a fine line that you walk when you figure out what you can charge and when it’s excessive and can ruin your credit score.
Get a secured credit card
If you can’t get a new credit card because you don’t have enough credit, consider a secured credit card. With this account, you make a security deposit that is equal to your credit line. The credit card company leaves the money in an account untouched unless you default on your account. In that case, the credit card company still gets paid because they withdraw the funds from your account. If you pay your bill as agreed, your money in the account goes untouched. When you close the account, after you build good credit, you receive the deposit back.
Become an authorized user
If you can’t get your own credit card just yet, consider asking a relative (such as your parents) if you could be an authorized user on their credit card. Before you do this, though, make sure the credit card company reports authorized users to the credit bureaus. Not all credit card companies do this so it won’t help you build good credit if they don’t report it.
Building good credit isn’t as hard as it might seem. Taking the above steps can help you start building credit and showing lenders that are a good risk. The most important thing is that you stay consistent, showing lenders that you are financially responsible.
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